Acceptable Forms of Earnest Money

Acceptable forms of earnest money that home sellers might accept include personal checks, certified checks, ACH bank transfers and wire transfers.

Cash is not a typically accepted form of earnest money, due to the difficulty in tracking and recording the transaction. Furthermore, it’s not in the buyer’s interest to use cash due to the difficulty in proving payment should any disputes arise.

As a result, the most commonly used forms payment for earnest money deposits are wire transfers and personal checks.

For example, in New York it’s common for the buyer’s attorney to include a personal check from the buyer along with the signed purchase contract. Should the seller decide to counter-sign the contract, their attorney would simply deposit the buyer’s personal check into their escrow account.

In Florida, it’s more common for the earnest money deposit to be wire transferred because the offer process is much more streamlined. Serious offers consist of buyers signing the standard Realtor purchase contract and sending it to the seller to counter-sign.

If the seller “accepts” and counter-signs, then the contract becomes binding and the buyer will typically wire the earnest money deposit within a certain number of days to the Florida closing attorney. Since contract signings are done electronically, there’s really not an opportunity for the buyer to drop off a personal check with the closing attorney.

How to pay earnest money without a check

You’re not required to use a check for the earnest money deposit, even though it may be custom to do so in certain states like New York. It’s equally acceptable, and often more customary in states like Florida for the buyer to wire their contract deposit after the contract has been fully executed by all parties.

For example, in New York it’s also acceptable for the buyer to immediately wire the earnest money deposit to the seller attorney’s escrow account as soon as the buyer’s attorney receives a copy of the fully signed contract.

If you do decide to wire the earnest money deposit, please make sure you abide by the timelines specified in the contract.

For example, in Florida buyers may be expected per the standard purchase contract to wire in their initial contract deposit within 3 days of the contract being fully executed, and the remainder of the contract deposit within 10 days.

If you’re late by a day or two, you may be given some leeway depending on the seller, but they may well have the right to cancel your contract for being late. So it’s best to abide by the contract terms exactly.

What if I don't have earnest money?

If you’re looking to buy a home but you don’t have enough funds to cover the earnest money deposit, then you should take a step back and seriously evaluate whether it makes sense for you to buying a home and taking on a mortgage.

Here are a few situations where this might occur, and what you might want to do in that situation.

You have assets but no liquidity

Perhaps you actually have a good amount of assets, but due to the illiquid nature of those assets you don’t happen to have a lot of cash, i.e. short-term liquidity.

In this situation, you have to evaluate whether you’re able to get a loan against your short-term assets and whether the terms of any such loan are acceptable to you. You should consult with your financial and tax adviser to see if it makes sense for you to get an asset based loan to cover perhaps not only your earnest money deposit, but your entire purchase price.

If you do end up getting a loan against your illiquid assets to fund your earnest money deposit, you should think seriously about how you plan to fund not just the balance of the purchase price, but housing related payments post-closing too.

You plan on receiving a gift from family

Perhaps the reason you don’t have money for an earnest money deposit is because you were planning on receiving a cash gift from your family to help with the purchase.

If this is the case, you’ll need to wait for the gift to arrive before submitting any offers or signing any contracts.

Acceptable forms of earnest money typical include wire transfers, personal checks, certified checks or ACH transfers. Norms vary by region.

As you can imagine, if you sign a contract but don’t come up with the contract deposit, then the seller is obviously not going to proceed with you even if you do some up with the money later. And this is assuming they don’t go after you for damages if the contract allows.

You haven’t started your new job yet

Perhaps you are a student with a job offer, and you haven’t started making income yet, but will do so in the future and be able to cover your mortgage and other housing payments.

These are all acceptable reasons for why it may be prudent for you to purchase a home if you don’t have enough money to even cover the earnest money deposit.

However, if you don’t have money to cover the earnest money deposit because you don’t have any savings, don’t have a job or aren’t making enough money to build up any savings, then it’s extremely imprudent for you to be taking on any housing related obligations such as a mortgage.

Getting a loan for earnest money deposit

It’s a terrible idea to get a loan to cover your earnest money deposit. That’s because if you don’t have enough savings to cover your contract deposit, then presumably you also don’t have enough money for the balance of the purchase price. That means you’ll need to secure a mortgage loan commitment from a bank.

However, banks typically want their mortgage to be the most senior creditor, meaning there isn’t another loan in front of them for repayment if you default.

That means if they have to foreclose on the collateral, which would be your home, they want to be first in line to collect the proceeds to pay off your debt.

As a result, lenders won’t be very positively inclined to loan you money if they find out that you’ve taken out a loan for the earnest money deposit, especially if the collateral for that loan is also your home.

What if it’s an unsecured loan?

Even if the loan you took out for the earnest money deposit is unsecured (i.e. like a credit card balance or a personal loan not tied to specific collateral), potential mortgage lenders won’t like the situation at all.

The whole point of putting money down as earnest money is so you as the borrower have “skin in the game.” If instead you simply borrow the earnest money deposit, then you literally have no skin in the game, and are much more likely to default in the eyes of lenders.

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Earnest money deposit assistance

It’s possible to get assistance with the earnest money deposit if you meet certain low-income requirements or live in certain areas to be eligible for a variety of downpayment assistance and first-time home buyer programs.

Additionally, if your mortgage loan size is below thresholds that allow it to be a conforming mortgage (i.e. vs jumbo), then you would be eligible for very low downpayment percentages  (i.e. like 3%, or even 0% for VA loans). Keep in mind though conforming mortgages will often require you to pay for PMI, i.e. mortgage insurance, which is an additional cost that non-conforming borrowers don’t need to worry about.

Additionally, it’s actually quite common for borrowers to get a gift from family (i.e. most often parents) to cover some or all of their downpayment.

If you receive this gift well enough in advance, then there’s no problem with you using some of the gift to cover your earnest money deposit.

This is actually a good idea because you should receive the gift in your bank account ideally more than 2 months prior to applying for a mortgage. That’s because banks will want to see usually 2 months of bank statement history, and will want to source any large transactions they see. However, if your gift came more than 2 months ago, they won’t see it and won’t need to source it.

So this way, not only will you save time on reducing administrative hassle, you can easily use part of the gifted downpayment to cover the earnest money deposit (i.e. typically 10% of the contract price, whereas your typical downpayment might be 20%).

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Disclosure: Hauseit® and its affiliates do not provide tax, legal, financial or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal, financial or accounting advice. No representation, guarantee or warranty of any kind is made regarding the completeness or accuracy of information provided.

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